Chorus Aviation Inc

Chorus Aviation Inc. (TSX: CHR) is a Canada-based company that provides regional aviation solutions and offers a range of regional aviation support services.

Key highlights

• Venturing into cargo market: The company is very thrilled to add cargo contract flying to its capabilities. The group sees the cargo business as a growth potential that will benefit from the success of eCommerce, and it is excited to be a part of it. This initiative, we feel, has the potential to offer up new avenues for additional cash flows. Recently it secured a three-year contract with Purolator for air cargo charter services.
• Registering sequential improvement: While the second quarter earnings were negatively impacted by certain aircraft being off-lease, negotiation of certain lease amendments including extensions, the 2021 CPA amendments, and a lower US dollar exchange rate, the company registered a healthy improvement on its operating matrix, which is appreciable.

• Healthy cash flows from operations: In the reported period the company clocked positive cash flows from operations of CAD 14.98 million compared to cash used in operations of CAD 28.18 million in the previous corresponding period.
• Minimizing debt: The company made a debt repayment of CAD 154.7 million related to scheduled repayments of CAD 49.1 million, early repayments of amortizing term loans on six aircraft totaling CAD 71.7 million and the repayment of all deferred amounts owing under aircraft loans with its largest lender in the amount of CAD 33.9 million. On a sequential basis the company also improved its debt-equity ratio at 2.96x from 3.57x.

Financial overview of Q2 2021 (expressed in thousands of CAD)

Source: Company

• In Q2 2021, the operating revenue increased 8.6% to CAD 199.87 million, compared to CAD 184.00 million in the previous corresponding period. Increased revenue in the RAS segment was attributable to the increase in Controllable Cost Revenue and Pass-Through Revenue as a result of increased flying activity.
• Total operating expenses increased to CAD 160.46 million compared to CAD 150.32 million in Q2 2020, primarily due to higher salaries along higher airport and navigation fees, partially offset by lower depreciation cost.

• Operating income for the reported period stood at CAD 39.4 million, against a profit of CAD 33.6 million in the previous corresponding period.
• Income before income tax was at CAD 27.1 million against CAD 30.3 million in pcp. Decline in income before tax was mainly due to higher interest expense and lower foreign exchange gain.
• The company's net profit stood at CAD 21.5 million in the reported quarter, against CAD 29.1 million, primarily due to the above-stated reasons along higher income tax expense.  
  

Risks associated with investment

Further extension of restrictive measures to contain Covid-19 pandemic would dampen the group’s performance. Moreover, the company may witness a headwind from lower passenger footfalls. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The COVID-19 pandemic and government sanctions have posed unparalleled obstacles for the passenger aviation industry worldwide. Still, the organization is excited by the development of various COVID-19 vaccinations and anticipates that flying volume will steadily increase, allowing them to generate more revenue. Furthermore, the company entered the cargo contract flying space as it seeks growth opportunities due to the rise in e-commerce, and we believe this would provide fresh cash flows. Moreover, the company is continuously improving its operating matrix and debt equity ratio on sequential basis. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 3.99 on August 16, 2021. We have considered Cargojet Inc, Southwest Airlines Co, Spirit Airlines Inc, etc., as the peer group for comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Price Chart (as on August 16, 2021). Source: REFINITIV, Analysis by Kalkine Group 

European Residential REIT

European Residential REIT (TSX: ERE.UN) is a publicly-traded unincorporated, open-ended REIT focused on aggregating a portfolio of high quality, multi-residential real estate assets in key European markets with solid fundamentals. Its initial focus is on the Netherland.

Key Highlights

• An income play: The group continues with a track record of dividend payment. Recently, the company announced a monthly dividend of €0.00917per unit payable on August 16, 2021. Moreover, the stock offers a dividend yield of ~3.6%, which is decent considering the current interest rate environment.
• Improving operating matrix:  Despite the concerns about the impact of an increase in instances of the Delta form of the coronavirus on growth, the REIT improved its operating matrix, which is commendable. Its operating revenue in Q2 2021, increased 9% to € 18.7 million against € 17.2 million in the previous corresponding period, while NOI margin also improved by 2% to 78.2% and FFO rose 13% to € 8.6 million.
• Healthy occupancy: The REIT's commercial property occupancy remained steady at 100.0 percent as of June 30, 2021, while residential property occupancy fell to 98.0% in the reporting period, compared to 98.8% as of June 30, 2020. However, the REITs freshly purchased newly constructed property is responsible for 26% of residential vacancies.
• Substantial presence in high growth urban markets: The company has a significant presence in urban areas, as well as a proven track record of high rental growth. As a result, we anticipate substantial cash flow growth in the future quarters as a result of the aforementioned. The average monthly rent of multi-residential units climbed to € 865 in Q2 2021, up from € 832 in the previous quarter.
• Acquired two multi-residential properties: The REIT has announced the purchase of two multi-residential buildings in the Netherlands. The first property is now 98% leased at an occupied Average Monthly Rent of €922, while the second property in Amsterdam has 33 residential units. We feel, an acquisition will complement and add value to the current asset portfolio.
  

Financial overview of Q2 2021 (In thousands of €)

Source: Company

• In Q2 2021, the REIT posted its operating revenues at € 18.74 million, comparatively higher than € 17.24 million in the previous corresponding period. The increase is primarily due to accretive acquisitions and an increase in AMR on the stabilized portfolio.
• Net Rental Income stood at € 14.65 million v/s € 13.14 million in the previous corresponding period.
• The REIT reported an income before tax of € 37.93 million compared to a loss of € 33.96 million in pcp, primarily due to net movement in the fair value of investment properties.
• Net income stood at € 27.99 million, against a net loss of € 35.85 million in the previous corresponding period.
  

Risks associated with investment

Change in consumer preferences of relocating from city centers to suburbs would lead to lower demand from the urban areas, which might be a key concern as the group derives a substantial portion of its revenue from the urban region.

Valuation Methodology (Illustrative): EV to Sales

The company reported strong operating results in Q2 2021, fuelled by accretive acquisitions and ongoing strong rental growth, with a 4% increase in Stabilized Occupied AMR along 9% improved operating revenues at €18.7 million. The occupancy for residential and commercial properties remained stable at 98% and 100.0%, respectively. However, 26% of residential vacancy is attributable to the REIT's recently acquired newly built property. The REIT also collected residential rental revenue consistently with its historical average, which provided healthy cash flows. Furthermore, the multi-residential asset class in Europe seems resilient and highly defensive, indicates stable cash flow generation. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 4.57 as on August 16, 2021. We have considered Killam Apartment REIT, Boardwalk REIT, Artis REIT etc as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.